01/06/03

If you build it, more business will come. Or so YoCream International executives thought back in 2000.

They were coming off a terrific year, with sales and profits both skyrocketing more than 40 percent from 1998 levels. The company was using nearly three-fourths of the capacity at its frozen confection plant in Northeast Portland.

"You start reaching those points, and you've got to start thinking, 'I've got a major customer, and they're growing fast. Are we going to be able to meet their requirements?' " said John Hanna, YoCream's chief executive.

So Hanna, without knowing the extent of the recession to come, signed off on a $3 million upgrade to the Northeast Portland production plant that would nearly triple its capacity. Then the economy started snowballing downhill, and YoCream suffered through a miserable 2001.

But, ultimately, the gamble paid off.

Next week, the company is expected to release fiscal 2002 year-end results that show double-digit percentage gains in both sales and profits. YoCream's stock more than doubled last year, closing at $7.94 a share Friday, making it Oregon's top performer.

YoCream's experience shows how increased productivity can lead to improved profits, even when the economy and other factors work against a company.

YoCream "always seems to come out on top," said Alan Bubitz, a vice president of Costco Wholesale, YoCream's biggest customer.

It was a long climb to the top after 2001. On top of a national recession, costs for vanilla, a staple ingredient in YoCream's products, tripled after hurricanes wrecked crops. In addition, the nation's appetite for frozen yogurt continued to decline. By the end of 2001, YoCream, whose stock is listed on the Nasdaq small cap market, reported flat sales and a 25 percent decline in profits. The tumble came after four consecutive years of gains.

The circumstances appeared dire for a company that had invested in an upgraded production plant with the assumption demand for its products would grow. It was that investment that helped rescue YoCream from the recession. The new plant allowed the company to focus on churning out new types of frozen yogurt, smoothies and ice cream while reducing the turnaround time required to produce products. The new products and promise of fast deliveries helped YoCream attract new customers.

The company, founded in 1977, completed the expansion project in early 2001. The upgrade cut production times in half and allowed employees to assemble and pack three different products at the same time, up from two. Before, the limited capacity required extensive planning and made production runs labor-intensive, racking up overtime costs.

The ability to create new products faster -- including a soy-based frozen yogurt that the company is just beginning to sell -- allowed YoCream to overcome the trend of declining sales of traditional frozen yogurt.

For example, YoCream researchers concocted a custom ice cream for Tully's Coffee stores in three to four months last year.

"Normally, it would take companies literally years," Hanna said.

Officials at General Mills, a much larger company and a top rival with its Columbo brand frozen yogurt, declined to reveal how fast it can make a new product. "We move as quickly as we can," said Aimee Feldman, a company spokeswoman.

YoCream's expanded plant, where most of its 52 employees work, is running at about 40 percent capacity now, compared with about 70 percent before the expansion. The numbers reveal the short-term downside to investing in capital improvements: an increase in overhead costs and reduced profits.

But longer term, "if you feel you're going to able to break through with additional business, it's a good thing," said David Lakey, president of The Lake Group, a Portland-based consumer products marketing and consulting firm. "You need to have confidence."

Hanna has it. Especially after landing an alliance with The Dannon Co. in spring 2001. The deal initially called for YoCream to supply Dannon's customers with frozen yogurt and expanded a few months later to include a co-branded line of soft-serve frozen yogurt.

Beginning this year, the two companies will combine sales forces, allowing the smaller YoCream to pitch its products to big distributors that didn't return calls before. New York-based Dannon benefits from having the YoCream roster of products to complement its related yogurt offerings.

"The power of the Dannon name has opened doors to us in one month vs. the six months or a year it would take us to get in before," Hanna said.

He credits the partnership with creating at least half of last year's gains in sales and profits.

The alliance has led to a broader array of customers --including government and military outlets abroad -- reducing YoCream's reliance on its biggest customer, Costco Wholesale. The retailer accounts for more than half of YoCream's annual sales. Hanna said he hopes to have the Costco side of the business drop below 50 percent by next year.

Expanding its customer base is a big step for YoCream, or any other company that depends on one customer for such a large percentage of sales.

"It's a big risk," said Lakey, the consultant. "As long as the relationship is good and they like your price and service and product offering, then it's fine. But if something changes, you could lose part or all of the contract and that could have a significant impact on business."

YoCream has supplied Costco's food court with frozen yogurt for more than a dozen years, every year meeting Costco's demands for taste, flexibility and lower prices, said Bubitz, the Costco vice president.

"Being smaller and more nimble allows them to do things that some of the bigger guys aren't willing to do," he said.

With improved productivity accomplished, YoCream has turned its attention to cutting costs, which increased with the new plant. Since November, Hanna has met with other top executives to figure out how to shave $1 million in expenses this year. The unknowns in the economy make the goal more of an urgent need, Hanna said.

Plus, he wants to keep YoCream's red-hot growth from freezing.

Boaz Herzog: 503-412-7072, boazherzog@news.oregonian.com.

For more information, contact Terry Lusetti, YoCream Investor Relations, 503-256-3754